Gary North’s Reality Check
Certain economic ideas that are both logically wrong and unsupported by historical facts, and which have been known to be wrong for 250 years, are still widely held. This annoys economists.
There is something that seems inherent in men’s approach to thinking about their own wealth that persuades them that what they have seen, over and over, in nation after nation, either did not happen, or, if it clearly did happen, will not continue.
One of these ideas is that sales taxes on imported goods increase the wealth of most people in society. This is the doctrine that tariffs and quotas imposed by the government somehow make people richer. This error was refuted definitively by one of the greatest philosophers of all time, David Hume, in 1752. About 25 years later, it was refuted in detail by Adam Smith, David Hume’s friend, in his classic book, The Wealth of Nations. Nevertheless, despite almost universal agreement among economists, and despite repeated political successes in lowering tariffs and quotas, which have led to increasing prosperity everywhere, there is still a hard core of anti-economics thinking that says that the federal government — but never state and local governments — needs to increase sales taxes on imported goods, or else we will all be made poor.
I have written many times about this over the last 45 years, and I intend to write a lot more, but I have no illusion that the anti-economists among us will never figure out that national sales taxes on imports do not make us richer. Some people simply do not have the intellectual capability of following a line of economic reasoning. This includes people who believe that sales taxes on imported goods make most people wealthier.
THE LUDDITE MENTALITY
There is another error, comparable to the error of the pro-sales tax non-economists, which is also widely held. This is the belief that machinery makes workers poorer. It is usually described as the Luddite philosophy. A man named Ned Ludd (or Lud) supposedly broke knitting machines in a fit of rage in 1779. In 1811, an article on Ludd was published in a newspaper. When people then began destroying machinery, they were called Luddites.
Who were the attackers? They were people who had been employed as relatively high paid producers of goods in narrow markets that catered to better-off clients. They found that they had fewer customers when other producers began to use machinery to mass produce these goods, thereby increasing the supply of goods. This forced down prices. Those guild members who had for centuries used political power in urban areas to gain a monopoly in specific markets found that price competition from these new goods was reducing their income. In response, they destroyed machinery. In other words, they used violence against property owners in order to maintain their monopoly. Before, they used political power to achieve this.
The phrase “saboteur” comes from the French word for shoe, “sabot.” Workers threw shoes into machinery in order to destroy the machinery, and thereby reduce the output of highly specific goods. This was seen as destructive by most people, but it clearly was a short-term benefit to those who were facing competition from the machines. It was one more case of violence against property owners.
Most people believe today that such violence is wrong morally, and they also believe that it is wrong economically. This is an advantage we have today. There are large numbers of people who have begun to understand a basic economic principle, namely, that whatever increases the supply of goods, and which is also profitable to the person increasing the supply of goods, is a good thing for most members of society.
The trouble is, the philosophy of the Luddites is still with us. It specifically has to do with the criticism of robotics. We still see people who have little economic understanding of the nature of free markets and their relationship to economic prosperity. These people are hostile to the use of robots in all areas of production. Well, this is not quite correct. They accept robotics in traditional lines of manufacturing, which have used robots for 30 or 40 years. In other words, they become traditionalists. The good old days were good, meaning the good old days 30 or 40 years ago. Those days were much better than the days of hundred years ago or 200 years ago.
Yet the increase in productivity which got the world to the good old days of 40 years ago was based on the adoption of techniques of mass production that we today would call robotics. It was the substitution of machinery, which in turn rested on new supplies of energy, which enabled the whole world to get richer. Think of the early inventions of the 19th century. Think of the railroad. Think of the grain reaper. Think of the sewing machine. All of these substituted equipment for manual dexterity. John Henry lost the competition to the steam driver, and the world was better off.
No matter how many stories come to us about the increased economic lifestyle that the world enjoys because of increased use of energy and increased use of machinery, the Luddite mentality still is with us. We are told that automation is going to make us poorer. We have been told this for 200 years.
But improvements in our lifestyle are based on an increased quantity of goods and services. This has made possible by automation.
There is a fundamental rule of economics which should not be ignored: anything that can be done by a machine profitably should be done by a machine. Why is this true? Because human labor is by far the most versatile and mobile of all capital. People can learn new ways of serving customers. Old dogs really can learn new tricks. But, in order to get them to learn new tricks, they need to face reality, namely, that whatever they did before to earn a living can be done better and cheaper by machine. Old dogs can learn new tricks, but necessity is the mother of invention. Old dogs prefer doing old tricks. They prefer high income for doing their old tricks. But economic progress does not let us continue to make high income from old tricks whenever there are new tools available that will enable newcomers to do the same tricks, and do them even better, at a lower price.
(For the rest of my article, click the link.)